Of Monte Paschi, Mario Draghi and the ECB

Today let us turn our attention to the long-running theme which is the Italian banking sector and in particular Banca Monte dei Paschi di Siena (BMPS) the world’s oldest bank. There was always going to be action post the Italian referendum actually whichever way the vote went but in particular with a no vote. This morning our favourite penny stock has been giving us an example of this as highlighted below by the Financial Times.

Care is needed with the chart as the old Y axis trick is at stake and misses past vastly larger falls in the share price of BMPS. But let us examine the news which has brought us here. Reuters was on the case yesterday afternoon.

The Italian treasury is considering raising its stake in Monte dei Paschi di Siena (MI:BMPS) to help the ailing lender remain in business by buying subordinated debt held by retail investors and converting it into equity, two sources with knowledge of the matter said.

The classic leak to see what the reaction is, trial balloon! Is there an Italian version of Yes Prime Minister? After all such a move would be against Euro area banking rules. It would also be something of an electoral bribe as the retail investors who bought bank debt stock ( what could go wrong?) get the equivalent of the PPI payouts in the UK, although the difference would be that the Italian taxpayer was explicitly paying for it.

On top of that the treasury would buy junior debt held by retail investors to ensure they do not suffer any losses, one of the sources said.

A second source within Italy’s government confirmed the plan. Some 40,000 retail investors hold around 2 billion euros of the Tuscan bank’s junior bonds.

This morning

The written equivalent of rhetoric has gained pace according to La Stampa via Google Translate.

But the only rescue of Siena would be like closing a hole in a tank full of holes. The decree to which the Treasury works worth far more than the three-five billion invoked the market for Siena, and at the moment does not provide for the direct intervention of the state, but that of Europe through the bottom Save-States ESM. The dancing figure indicated by two concordant sources of the Treasury is 15 billion euro.

I did enjoy “like closing a hole in a tank full of holes” as a description of BMPS and wonder what the Italian phrase is for this? Also there is a problem with using the ESM.

The ESM funds are formally a loan and therefore involve the signing of an agreement with Europe which requires those in technical jargon are called “conditionality.”

So what was called the Troika until that came to be debased and is now called the institutions ( a bit like the leaky Windscale nuclear reprocessing plant in the UK became leak-fee Sellafield) would be setting rules for Italy. Although them being applied seems unlikely with La Stampa pointing out that Spain applied them in theory rather than in practice. The other main issue is that Euro area banking rules have changed and now require bail-ins rather than bailouts although of course even the “rules-based organisation” the ECB has bypassed a few rules in its time.

How did we get here?

The meeting on Monday for the 5 billion Euro debt for equity swap does not seem to have got anyone to put their hands in their wallets or purses. I can’t say I blame them.

The time line of a banking bailout

I have posted this several times before but it seems appropriate to give it another airing.

1. The Board issues a statement accusing bloggers of spreading both irresponsible and factually incorrect rumours as the bank is sound and has no need of new capital.

2. The Bank issues a statement of confidence in its management.

3. The Bank tries to raise more private capital in spite of it having no need for it.

4. If this does not work the relevant government(s) express(es) complete confidence in the bank and tell us that it has a sound management structure and business model. Indeed the bank had only recently been giving the government advice as to how to run the public-sector more efficiently.

5. The relevant government(s) tell us that they are stepping in to help the bank but the problems are both minor and short-term and are of no public concern.

6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

7.Part-nationalisation of the bank is announced and taxpayers are told that a profit will result from this sound and wise investment.

8. Full nationalisation is announced to the sound of teeth being pulled without any anaesthetic.

9. Debt costs of the relevant sovereign nation or nations rise.

10. Consequently that nation finds that its credit rating is downgraded.

11. It is announced that due to difficult financial times public spending needs to be trimmed and taxes such as Value Added Tax need to be raised. It is also announced that nobody could possibly have forseen this and that nobody is to blame apart from some irresponsible rumour mongers who are the equivalent of terrorists. A new law is mooted to help stop such financial terrorism from ever happening again.

12. Some members of the press inform us that bank directors were both “able and skilled” and that none of the blame can possibly be put down to them as they get a new highly paid job elsewhere.

13. Former bank directors often leave the new job due to “unforseen difficulties”.

We seem to find ourselves at point 7 although I must warn you that point 8 can then arrive faster than Usain Bolt.

Enter Mario Draghi

The President of the European Central Bank has been involved in this issue for years and indeed decades as I pointed out on the 21st of January.

If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.

Of course Mario issued his “everything it takes” speech in the summer of 2012 which was explicitly for the Euro but also has implicitly helped the Italian banks. For example the sovereign bond buying of its QE program has given profits to their large holdings of Italian government debt. The purchases of mortgage debt must have helped their mortgage books as well. Yet in spite of this we are where we are.

Actually he went further before the referendum when he promised to step-up purchases of Italian government bonds should the vote be no. So my argument against Italy going to the ESM would be that it could issue the debt itself very cheaply with Mario’s bond buyers hovering in the background and maybe foreground. Awkward though if his bond buying allows Italy to break the new ECB driven bank bail in rules. After all he keeps telling us that the ECB is a “rules based organisation”.

I expect him to announce tomorrow that the ECB programs will not end in March and give us something along the lines of  a 6 month extension. His committees well report but have lost a lot of their modus operandi with the post Trump rise in bond yields although there is still the “safe haven” issue of Germany’s 2 year debt being issued today at -0.71%.


This has been a very long-running saga but one of my markers is back in play.

Italy is not preparing a request for a loan from the European Stability Mechanism (ESM) to support its banking sector, a Treasury spokesman said on Wednesday, denying a newspaper report.

Never believe anything until it is officially denied!

Of course the media produce all sorts of stories as we see in the world of football transfers where all sorts of inflated numbers appear as click bait. But some of them like Paul Pogba to Manchester United do happen. This is where we find ourselves as for example saying this makes Italy insolvent is not quite true. The QE dam of Mario Draghi holds back that flood for now and maybe “To Infinity! And Beyond” so point 9 of my banking timeline may be skipped. However without QE Italy would face solvency questions which a bank bailout would merely add to.

I bet they now wish they had like used the ESM in 2012 like Spain did.

Number Crunching

For BMPS from here on the 21st of January.

MontePaschi: Total capital raised since 2008: €14bn Market value today: €1.5bn ( h/t Macrocredit )

For Italy from Istat earlier.

The unemployment rate remained stable for the fourth consecutive quarter in comparison to the previous quarter and up 0.4 points from the same quarter of 2015, with a growth rate of 132 thousand unemployed.

Not much sign of any recovery there…


28 thoughts on “Of Monte Paschi, Mario Draghi and the ECB

  1. 14. Those Directors that stay are awarded huge bonuses (sourced from public funds) for the part they played in ‘saving the bank’

  2. Hello Shaun ,

    so what to do with these Banks ?

    I take it n one has looked into any Mafia connections ( lead boots maybe found ! )

    Can Germany afford it ?


    • Hi Forbin

      The phrase “swimming with the fishes” occured to me as well earlier. Whilst the province of Siena is in Tuscany and thus well away from the Mafia heartlands of course it has operations further south.

      Some years ago Deutsche Bank stopped me dealing with some of the smaller Italian banks on the grounds there had to be mafia money there. As they had bought BAI it was hard not to have a wry smile at that.

  3. and in other news

    EU fines three banks €485m for rate rigging

    no one apparently at the top was found guilty of anything


    PS: so Italy’s bank are also run by “Guiltless” leader …

  4. If I understand your critique of Monti correctly, he is like a day labourer who can dig a hole deeper but unlike a day labourer he has not got a clue how to fill it in.

    If I ask a builder to dig a hole he would be well advised to warn me that the house would likely fall in the hole. Does Goldman Sachs get a letter of comfort in case it all falls down or is that not necessary for financial engineers?

    • Hi Peter

      Financial engineering is a strange profession as the higher you climb the greasy pole the less responsible you are. Should your financial house of cards collapse a few juniors are thrown on the funeral pyre from time to time but those as the top are called in as “experts” to help rebuild it.

  5. ‘If we look further back in time we see that the law covering Italian financial markets is often called the Draghi Law and we note that around the turn of the century he was Director General of the Italian Treasury. Then he went to Goldman Sachs which was busy designing derivatives for Italy and Monte Paschi as well as Greece before returning to head the Bank of Italy. So if there is a crime his fingerprints are all over it.’

    Thanks for your open approach to analysing the evidence Shaun.I hadn’t realised he had been DG at the Italian Treasury………simply stunning.Was this a case of promoting someone out of a position where they might destroy a country’s economy to one where they might damage a continents?

    Also,love the timeline.Too true.Although as Ian suggests it might be worth amending with a ‘bonus point’.RBS’s record is exemplary in this regard.8 years of losses without the slightest dint in the bonus pool.

    • Hi Dutch

      Actually RBS came up today as the journalist Ian Fraser pointed out that the Euribor fines had missed RBS out. I replied that RBS is always present! His reply?

      “I was wrong. #RBS reached a £320m settlement with the EU over its conspiracy to rig benchmarks (Libor, Euribor) in Dec ’13 ”

      As to Mario this is so Yes Prime Minister ( promoting someone to cover up the problems that they had created…).

  6. The EU (and the ECB) tell us that with Brexit there are rules that cannot be broken or changed. Except when it suits them! They will find a fudge to ensure that Italian banks are saved and the taxpayer coughs up – again

  7. Shaun,
    I fear that your are becoming too cynical? Your list has been honed through experience and you are most likely exactly right in your prognosis but it does depress me. I have been waiting some 8 years for closure on this bungled debt management issue and all you offer is yet more unspecified years of pretence. If the ECB gets away with it then so too can Carney and QE and May on a bungled Brexit and so on and so on…

    We know already the symptoms of this disease and they can only worsen as the fixups multiply:

    1) Young people are presistently disadvantaged (without assets and opportunity)
    2) OLD people (boomers) enjoy disproportionate benefit (75% mortage discount and home asset appreciation)
    3) OLD people (boomers) rub-in their misplaced economic power by voting for the status quo, blocking development, change and going on 3x cruises per year
    4) Pensions for younger cohorts are trashed whilst old ones enjoy un-contributed benefits
    5) People at the bottom only get “gig economy” work and eventually turn into serfs and paupers
    6) Elites in Government and Banks enjoy continued power maintaining status quo.
    7) Some younger people are brought and bought into the game with “help to buy” and inheritance
    8) QE Lending and afforable credit seeks only the lowest risk recipients either close to the priniting press or with assets to back them.
    9) Market risk /reward innovation investment is completely side-lined

    I fear our speculation about fair and consequential outcomes is just some kind of daydream.Only a black swan event is going to upset this perverse theatre and cronyism.

    Paul C.

    • Hi Paul C

      I am not so sure that the word cynical applies as this is the same list I have used several times now! Ian’s suggested addition is a fair point and I could drop point 9 as “debt costs rise” in the QE era applies much less. But in essence this is like deja vu all over again. This has been added to this evening. From the FT.

      “Italy demands more time from ECB to rescue Monte dei Paschi
      Bank’s board wants until mid-January to pull off €5bn equity injection”

      How many years have they had again?

      • OK Shaun, I withdraw cynical and propose “hardened”. I saw the MPS reference on ZeroHedge, along with some detail on what they think is “blackmail”, and it seems plausible.

  8. Great blog, Shaun, as always.
    John and Jonathan Theodore said about the first bail-in of euro area banks, in “Cyprus and the Financial Crisis”: “The final bail-in/bailout package was sold as punishing [Russian] oligarchs to protect the ordinary public, but the economic implications of the bail-in conditions still hit those many Cypriots _ or foreign nationals without a Smaug-sized savings balance, but who held accounts in the same banks as the rich Russian, Ukrainian and other non-EU depositors”. They add that now that bail-ins have become official policy for the EU: “If you are a business, a saver…or anyone else with…a moderately large deposit account, then the safety of money depends, at the last resort, on the political considerations of the European Union and the IMF. A practice that used to offer high liquidity, no risk, and minimal returns, now offers conditional liquidity, minimal returns, and risks which are absolutely unknown.”

  9. Hi Shaun,

    Two things:

    – about your curiosity on “like closing a hole in a tank full of holes” I can tell you that it is the letteral translation from the corresponding phrase in italian. The imagine, and the meaning, are the same.

    – I don’t agree with your point n. 9. Just the UK showed how to manage an awful amount of bank debt loaded on the shoulder of UK taxpayers: call it “temporary intervention” and don’t count it in the debt to gdp statistics! https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/timeseries/bkqa/pusf

    I much appreciate your informed and independent blog.

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